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Sumo Group “Solid trading and manageable impact from the crisis” says Zeus Capital

Sumo Group PLC (LON:SUMO) provided an update that confirms to us the strength and resilience of its business and market. The company released solid unaudited 2019 results and has started the current year strongly. Sumo identified some impact from the pandemic that appears manageable, in our view. Also comforting is the company’s strong cash position alongside positive FCF. More details are expected with audited results, which Sumo is delaying, in line with the FCA’s requests. We continue to see Sumo as an IP-driven leader in the video game market. 

Solid 2019 results: Sumo released unaudited 2019 results slightly ahead of our expectations. EBITDA was £14.1m, slightly ahead our estimate of £13.9m. Solid results were supported by high gross margin excluding royalties of 50.2%, ahead of our estimate of 48.4%, while revenue was £49.0m, slightly below our estimate of £51.3m. Net cash was £12.9m, slightly below our estimate of £14.1m. Unsurprisingly, Sumo believes it is too early to quantify its outlook given the current market uncertainty.

Impact from the crisis: The pandemic has required staff to work remotely, limited business development opportunities and hindered recruitment. But end market demand has increased and recruitment prior to lockdown had been tracking ahead:

  • The necessity for staff to work from home has led to some disruption and loss of efficiency that could put some pressure on margins and delay milestone payments. However, this may be partly offset by strong market demand (discussed below) that could lead to acceleration in royalty revenues and other revenue lines.
  • Net recruitment has slowed and this has the potential to hinder revenue outlook. But fortunately recruitment ahead of the crisis had been progressing well. Indeed, Sumo appears to have had a strong start to 2020 before the Corona virus impact.

Resilient: As a whole, Sumo Group appears resilient in the current uncertainty: The company is supported by strong end market demand, a resilient business model and ample cash with positive free cash flow:

  • The video game market is benefiting from ‘stay at home’ trends that should lead to increased game development.
  • Sumo has a high visibility on contracted or near contracted revenue of approximately 71%.
  • Sumo has £23.6m in cash at 24 March 2020, including £10m drawn down from its £13m committed revolving credit facility.
  • The company will announce audited results in due course.

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